Aviation: the wings of climate change

We look at how the aviation sector is adjusting to meet ambitious targets to reduce greenhouse gas emissions

07/07/2016

Belinda Gan

Associate Product Manager, Global Sustainability

According to the International Energy Agency (IEA), the growth in greenhouse gas (GHG) emissions from aviation will be among the fastest of any sector over the next few decades.

The sector is currently responsible for 2–3% of total global GHG emissions. Under a business-as-usual scenario and without any adaptation or regulatory intervention, it could be responsible for approximately 22% of world emissions by 2050, assuming every other sector reduced emissions in line with a “two degrees” scenario.

Voluntary framework

Despite these current and anticipated impacts, aviation managed to sidestep the COP21 climate negotiations held in Paris in December 2015. There was no direct reference to the sector in the final agreement drawn up by the convention, leaving it to industry associations, such as the International Civil Aviation Organization (ICAO), to come up with its own voluntary emissions-reduction framework.

The primary goal of the Paris agreement is to hold the increase in global average temperature to well below two degrees celsius above pre-industrial levels. Based on the IEA’s scenario analysis, achieving that goal will mean reducing the absolute volume of global GHG emissions by around 60% over the next 35 years. While there is little clarity on the policy measures that will underpin that goal, momentum towards more stringent regulatory intervention is growing and we use it as our baseline in assessing industries’ readiness to adapt.

Over the past few years, ICAO and IATA (International Air Transport Association) have been active on the climate change front, and drafted a series of measures in response. Crucially, ICAO is expected to reach a final agreement in October 2016. IATA has outlined a long-term goal to achieve “a reduction in net aviation CO2 emissions of 50% by 2050, relative to 2005 levels”. Details of how this will be achieved are less clear.

Regulatory pressure

We apply an objective lens to gauge the scale of the challenge of halving GHG emissions against a backdrop of 3–5% annual demand growth. Achieving both implies an approximate 80–90% reduction in emissions intensity through 2050. Extending the goals the ICAO targets for 2009–2020 (delivery of which are now relatively well assured) through 2050 implies fleet renewals, operational improvements, infrastructure investments, technology advances and biofuel use could collectively contribute around half of the required emissions reduction.

Extending near-term goals is optimistic; many industry and technical analyses indicate that the rules of manufacturing, physics and gravity could limit potential for efficiency gains before that assumption is met.

The challenge facing the industry is therefore daunting. Halving emissions will mean heavy reliance on offset mechanisms. Although these can optically allow any industry to bridge a gap between reduction targets and tangible steps, they clearly cannot be used in every part of the economy and regulatory pressure is likely to push harder on practical change instead.

Early-adopter advantage

Most players in the sector, from aircraft manufacturers to airliners and airport operators, have made pledges to contribute to a steep reduction in emissions. They generally favour a global voluntary approach over regional regulatory schemes, such as the European Union’s Emissions Trading Scheme. Delivering change on the scale implied by global climate commitments will mean a more fundamental rethink of business models than the incremental benefits efficiency gains and operational optimisation have delivered. Regulatory pressures are likely to intensify if voluntary progress is too slow.

While more radical changes are likely to be needed in the longer term, companies that have started earlier – for instance by investing in more efficient fleet, maintaining higher load factors or optimising routes – will be better able to maintain financial flexibility as pressures intensify.

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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

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